AFAR 2 - Pre exam refresh Flashcards
When can a DB pension scheme member potentially commute their entire pension entitlement and draw all of the benefits as a tax-free lump sum?
*If their life expectancy is less than 12 months
What is the ‘Pension input period’?
*The time frame in which individual’s pension benefits can be accrued and set against the annual allowance.
*Pension benefits are increased by contributions, increases in pension rights (DB scheme) or salary increases.
What is the ‘annual allowance?’
*A limit on how much pension benefits can be accrued before a tax charge is due.
*Currently, £60,000
*earnings cap: the tax relief on pension contributions is capped at the higher of £3,600 or 100% of your earnings
*Tapered AA: if adjusted income is greater than £240k your AA is reduced by £1 for every £2 over this amount
* The minimum AA is £10,000
*Annual allowance can be carried forwards (unlike MPAA) from the past 3 years, so long as:
- used all current allowance
- UK taxpayer at time of year brought forward.
- active member of pension scheme at time of year brought forward
‘Smoothing’ is a feature of which type of pension fund? Explain what it is?
*With-profits funds
*Provides a more stable return by spreading investment gains and losses over a period of time.
*This is achieved by holding back some returns in good years to support payouts in years when investment performance is poorer.
Financial Reporting Standard (FRS) 17 requires employers to revalue the assets and liabilities of occupational pension funds every:
*Every three years
Client wishes to defer taking their state pension - How much will it increase by?
*It will increase by 1% for every 9 weeks it is deferred.
*It has to be deferred by 9 weeks
*5.78% for 1 year
Investment assets for retirement:
How should portfolio change as retirement becomes less than 10 years away?
*Shift from assets in equities towards Fixed-interest securities such as bonds and Gilts.
*Offers some growth, but avoids risk of loss closer to retirement.
The amount of a switch depends on the individual’s attitude to risk.
Investment assets for retirement:
What should the portfolio largely consist of if retirement is greater than 10 years away?
*Equities
*There is a good chance of capital growth ahead of inflation and the money can be tied up for the long term
SSAS (Small Self-administered Scheme). What is the maximum value the SSAS can use to purchase property?
*Can use assets and borrow up to 50% of its net assets.
Why might a personal pension holder choose flexi-access drawdown rather than an annuity?
*Gilt yields are low
*Flexibility of size and frequency of withdrawals
How does the majority of defined-contribution occupational pension schemes provide pension benefits on retirement?
*Purchasing an annuity for the member
Can members of a defined-benefit scheme take benefits early?
*Yes, members can take benefits after age 55 as with DC schemes.
*The pension will be based on their years of service less a probable early retirement penalty
What is the ‘lifestyling’ investment option in personal and stakeholder pensions?
*Some schemes provide an automatic switch in which money is moved from equities to fixed‑interest investments during the last five or ten years to retirement.
How is the state pension funded?
*It is funded by the current working population’s National insurance contributions.
*It is not funded in advance - the decline in birth rates and increase in life expectancy therefore poses an issue for future funding of the state pension.
How many qualifying years must be paid for full state pension entitlement?
- 35 Years (if retiring after April 2016)
(30 years before this date)
- 10 years minimum to receive any state pension
How much is the current full state pension?
*£11,502.40 (2024/2025)
*This can be deferred, and increases by 1% for every 9 weeks delayed - it has to be deferred by at least this amount
Current and future retirement age?
Depends on your date of birth:
*Currently is 66 (2024)
For those born after 5th April 1960, it’ll rise each month, one month at a time until it reaches 67 in April 2028.
*Increasing to 68 in 2028 (affecting those born after April 1977)
Options for retirement: ISAs
*While ISA contributions do not benefit from tax relief, there is no tax payable when the funds are withdrawn.
*Funds can be taken out at any age.
* LISAs offer 25% top up on deposits of up to £4000 (£1000 bonus per year)
*if this is withdrawn before retirement age there is a 25% penalty charge - not just the removal of the bonus
*However, withdrawals and growth is tax free.
*Contribution limit into ISAs each year is £20k for Pensions, it’s £60k.
Pension provision and public perception on long-term care provision.
*Perceived that those who save for their retirement effectively are penalised should they need care as all assets are taken into account when assessing how much is paid.
*Those who have little pension provisions pay little or nothing towards care costs.
*As of October 2023, a cap on an individual’s care costs was instigated by Gov. £86,000
What is the upper and lower capital limit in terms of benefits?
*The upper capital limit - Max value of chargeable assets owned before they can receive benefit from local authority:
- Currently, £23,250
- In Oct 25, £100,000
*The lower capital limit is the threshold below which people will not have to pay anything for their care from their assets:
- Currently £14,250
- In Oct 25, £20,000
Non-state pension: Defined contribution
*Also know as ‘money-purchase’ schemes
*Occupational or individual arrangements.
*Benefits are based on the amount of money in the fund
(which will, in turn, depend on the levels of contribution and investment performance).
*Contributions are made regularly by both employer and employee - often via salary sacrifice or net-pay arrangement
(Very similar, SS more complicated but saves on NICs)
What are the statutory minimum contributions into any occupational pension scheme?
Overall, 8% of the value of the employee’s salary must be contributed.
*Employers can contribute a minimum of 3%
Non-state pension: Defined benefit schemes. Explain/describe what they are
*Alternatively called ‘final-salary’ or ‘career-average’
*Occupational scheme.
*Benefits are based on an employee’s length of service, the scheme rules and salary.
*Should not be affected by investment performance.
The Pensions Act 2015 - Two important introductions
*Allowed individual’s access to their retirement savings without the need for a ‘minimum level of secure income’
*‘guidance guarantee’ - where everyone with a defined‑contribution pension arrangement is offered free, impartial guidance so they are clear on the range of options available to them at retirement.
The Pension regulator: Statutory objectives
*to protect the benefits of members of occupational pension schemes
*to protect the benefits of members of personal pension schemes where employees
have direct payment arrangements
*to promote and to improve understanding of the good administration of occupational
pension schemes
*to reduce the risk of situations arising that may lead to compensation being payable
from the Pension Protection Fund
*to maximise employer compliance with employer duties and with certain employment
safeguards
*in relation to defined benefit scheme funding, to minimise any adverse impact on the sustainable growth of an employer
The Pension regulator: Power’s fall into three categories
- Investigating schemes to identify and monitor risks.
- Putting things right
- Imposing fines and prosecuting certain offenses
- Requiring specific action to be taken by deadlines
- Recovering unpaid contributions from an employer - Acting against avoidance
-contribution notices, requiring the employer to make good the amount of the debt either to the scheme or to the Pension Protection Fund
- Financial support directions, which require financial support to be put in place for an underfunded scheme
- restoration orders, where assets can be restored to the scheme if there has been a transaction at an undervalue involving the scheme’s assets.
When are employers required to make contributions into employee pension scheme by?
*Must be made by the 22nd day (or 19th day if paying by cheque) of the month following the deduction from the employee’s pay.
What is the Pension Protection fund?
- Established by the Pensions Act 2004
- Protects members of private sector defined‑benefit schemes whose employers become insolvent with insufficient funds in their pension scheme.
*People who have not reached the original scheme’s normal retirement date receive 90 per cent of their accrued scheme entitlement immediately before the assessment date. (If they have reached original retirement age, it is 100%)
A pension scheme may be established by 4 different methods:
- a trust
- a contract
- a board resolution (Scotland)
- a deed poll
Pensions and divorce: three ways
Pensions are taken into account in a divorce settlement. There are three ways in which the situation can be assessed:
- Earmarking
- Splitting (sharing)
- Offsetting
Pensions and divorce: Offsetting
- Transfer value is added to the total assets of the marriage
*The assets are split but the scheme member retains the fund as part of their share.
For example, a scheme member may retain their pension but their ex‑spouse/civil partner may keep other assets, such as the house or the right to a certain income (assuming that the two assets are of similar value).
*Offsetting allows a clean break, so there is no need for the two parties to keep in touch after the settlement.
Pensions and divorce: Earmarking
*Court allocates a percentage of the scheme member’s future
pension entitlement to the ex‑spouse/civil partner.
*The earmarking order can apply to pension income and/or lump‑sum benefits (a separate order would be needed for each).
*The ex‑spouse/civil partner will receive a percentage of
the income or lump sum when the member crystallises the pension - if the scheme holder delays taking their pension the ex-spouse has to wait
*For tax purposes, the scheme member is held to have received all of the pension before passing part of it on to their ex‑spouse/civil partner
Pensions and divorce: Earmarking - Disadvantages
- It does not allow a clean break between the two parties.
- The scheme member decides when to crystallise the pension.
- If the scheme member is a higher‑rate or additional‑rate taxpayer, 40 per cent or 45 per cent income tax will be payable on the pension income. The ex‑spouse/civil partner can reclaim none of this even if they do not pay tax at the higher rates.
*Income benefits may be lost on the death of the scheme member.
* Entitlement to income may cease upon remarriage or upon a new civil partnership of the ex‑spouse/civil partner.
* The ex‑spouse/civil partner has no control over investment decisions made by the scheme member.
Pensions and divorce: Sharing (splitting)
*Court ascertains the value of the fund, known as the cash equivalent transfer value (CETV), and splits it on a percentage basis between the two parties.
*The proportions will depend on the judge’s interpretation of the situation, taking into account other assets.
- Each party will have their own independent fund and can take benefits as and when they wish, without reference to each other. Future contributions will be outside the split and will belong to whoever makes them.
*The splitting arrangement creates a debit (reduction) in the scheme member’s pension fund and the member is free to build the fund up as they wish. The amount transferred to the ex‑spouse/civil partner’s fund is a ‘credit’ to their pension.
*The credit is not treated as part of the recipient’s annual allowance, but will count towards their lifetime allowance. The debit will be taken away from the ‘donor’s’ fund when calculating their lifetime allowance.
*There is one exception to this: if a pension benefit is already in payment before the divorce, it will not count towards the ex‑spouse/civil partner’s lifetime allowance. This is
because it has already been assessed against the scheme member’s lifetime allowance. Effectively, their lifetime allowance is enhanced by the amount of the transfer.
Pensions and bankruptcy
*The bankrupt’s pension falls out of their estate, and the Trustee in Bankruptcy cannot claim rights over it.
*This rule applies to registered occupational, personal, stakeholder and retirement annuity schemes. It does not apply to unregistered schemes.
*However, if the court believes excessive contributions have been made to a pension scheme to avoid the assets being included, it can order the pension provider to make a payment to the trustee.
What is the earnings cap for tax relief on pension contributions?
*earnings cap: the tax relief on pension contributions is capped at the higher of £3,600 or 100% of your earnings.
*If no income, £3600 is used.
The state pension age is due to be raised to 68 by what date?
*Between 2037 and 2039
*It is now based on you date of birth, and is raised accordingly
The new state pension. For who? How is benefit calculated? How much benefit?
*For those retiring on or after 6th April 2016
*Provides a basic income for those above state pension age
*Based on an individuals NIC - minimum 10 years to receive anything, 35 to gain full amount.
*Full state pension is currently £221.20 per week or £11,502.40 per year
Basic state pension
- For those retiring before 6th April 2016
*The current full state pension (2024) £169.50 per week with those aged 80 and over earning an additional 25p per week.
*Each year is treated differently for calculating benefits
*Enough NICs = qualifying year = 30 qualifying years for basic
*If an individual couldn’t work owing to illness or unemployment, they may have been given credits towards the state pension.
*Credits reduced the number of qualifying years required to gain the full state pension
Deferral from the basic state pension
*More favourable than the new state pension
*Deferral of taking your pension for only 5 weeks would result in a 1% increase
*10.4% per annum.
*If deferred for over a year, the amount deferred could be taken as a tax-free lump sum, plus interest.
Considerations affecting both the basic and new state
pensions
*Both are not means-tested - entitlement does not depend on earnings or savings available.
- They are paid without tax deducted but are taxable
*the recipient’s tax code is adjusted to allow for the fact that the pension has been paid.
*Married couples and civil partners can qualify for two full single person’s state pensions if both have qualified for a full pension in their own right.
*Those entitled to a UK state pension who retire and move to live abroad are able, in most countries, to receive their UK state pension.
*Annual increase in line with the ‘triple lock’
Can you still receive your UK state pension if you retire and then move abroad?
*Yes, in most countries.
*If the country is in the EEA, Switzerland, Gibraltar, or any other country with an agreement with the UK - then their pension will adjust in line with inflation, so long as they live in the UK for 6 months or more
Explain what the ‘triple lock’ is
The triple lock is the guarantee of increase for new and basic state pension.
It is based on one of the three, which ever is greatest:
- Rate of inflation measured by the CPI
- Earnings growth
- 2.5%
*Additional state pension (SERPS and SP2) payable to those who reached state pension age before 6 April 2016 is only indexed in line with CPI inflation.
Explain the State earnings‑related pension scheme (SERPS)
*Pension scheme that ran from 1978-2002 when it was replaced by the State second pension (S2P)
*Anybody who was in SERPS between 1978 and 2002 and retired
before 6 April 2016, will receive SERPS benefits together with any S2P benefits accrued since 2002.
*SERPS was means tested; earnings between lower and upper earnings limits.
- Provided additional benefits on top of the basic state pension
*Objective: boost the basic state pension by 25% of an individual’s upper band earnings over a period of their best 20 years.
Conditions and amounts - Inheriting SERPS and S2P
- S2P = Maximum 50% of your spouse or civil partner’s State Second Pension.
*SERPS = The maximum you can inherit depends on when your spouse or civil partner died (100%-50%
Cannot inherit if you remarry before state pension age
Explain the state second pension (S2P)
*Objective: provide a more generous state pension than SERPS for low and moderate earners, and for certain carers and people with a long-term illness or disability.
- S2P gave those with low earnings a better pension than SERPS.
- The greatest benefit was for those classed as low earners.
- Carers and the disabled got credits towards S2P.
The state second pension was earnings related, as with SERPS.
Contracting out of SERPS and S2P
In 1988 it became possible to contract-out of first SERPS and then S2P.
This meant that the individual agreed to forgo benefits from SERPS or S2P in return for a reduced rate, or a rebate of, National Insurance contributions.
The contributions were then redirected into their private personal pension or occupational pension scheme
Pension credit - what is it’s objective? what are the two types? Is it taxable?
Objective: increase the pension income of many older people.
Two elements:
- Guarantee Credit: tops up your weekly income to a minimum level
- Savings Credit: extra payment for those who funded their retirement through other means other than the stage pension.
*It is means tested, unlike the other pensions (Based on income and savings)
*It is not taxable
Guarantee Credit
*For those from women’s state pension age and over.
*That have a weekly income below a threshold, known as the
‘appropriate amount’.
Guarantee Credit will provide a top-up payment to bring
income up to that level.
*Some may have higher ‘appropriate amounts’ such as those with disabilities or carers
*Capital (savings) over £10k (known as capital disregard) is said to produce ‘deemed income’ of £1 a week for every £500.
Example: if the appropriate amount for a single person was £173.75, and the individual earned £160 per week and had savings of £19k, they would not receive guarantee credit.
Their income would be deemed as £160 + £18 from savings
Savings credit
Objective: reward people who made some provision for their retirement.
*Payable to individuals who reached state pension age before 6 April
2016
*Can still be applied for if state pension age was reached before this date.
*To qualify:
*are part of a couple and one of them reached state pension age before 6 April 2016;
*were already getting Savings Credit up to that date; and
* have remained eligible since then.
If eligibility stops for any reason, it is not possible to claim for Savings Credit again.
Summary of tax benefits of pensions
- Tax relief on contributions into the pension fund
- No tax due on income received by or gains made by the fund
- A certain amount of tax‑free cash on retirement (to a maximum 25 per cent of the fund value)
*Known as the pension‑commencement lump sum.
*Afterwards, pension income is taxed as earned income, and subject to the individuals marginal tax bracket rate.
What is the the pension-commencement lump sum? (PCLS)
- A maximum of 25% of the pension fund can be taken tax-free
- This is a crystallisation event, hence the ‘commencement’
- In phased retirement, the individual can take the PCLS from a number of segments and leave the remainder invested.
-Any PCLS drawn from age 75 onwards will be restricted to 25% of the life time allowance remaining at age 75.
Eligibility for UK pension schemes
- Must be under the age of 75
- Be a resident in the UK during the tax year
- Have relevant earnings in the UK chargeable to income tax for the tax year in which the contribution is made
- have been resident in the UK at some point in the five years immediately before the tax year in which the contribution was made and when they became a member of the
scheme - the contributor, or their spouse or civil partner, must have received overseas income subject to UK income tax as a Crown employee.
In the case of those who have earnings subject to UK income tax, the personal contribution on which tax relief can be claimed is limited to the greater of £3,600 or their earned income.
Those without earned income, including children, are limited to £3,600 gross.
The personal contribution on which tax relief can be claimed is limited to… for those with income? For those without income
- Tax relief on pension contributions for those earning an income is the greater of £3,600 or or their earned income.
- For those without earned income, this is limited to £3,600 gross
Rules on contributions into a pension scheme
- There is no limit to how much you can contribute, but there is a level to which you do not receive tax relief - and may incur a tax charge
- This is called the annual allowance and is £60,000 (2024)
- The annual allowance is restricted to the ‘pension input period’ each year. this runs in line with the tax year April 6 - April 5
- Should an individual’s income (including employer contributions) exceed £260,000 then a taper is applied to the annual allowance
- For every £2 over this amount, £1 is deducted from the annual allowance
What happens if a non-eligible person makes contributions into a UK pension scheme?
They can still contribute and build their retirement find but they will not receive tax relief on the contributions
What is the annual allowance charge? An when are the two incidences when it does not apply?
- The annual allowance charge is due on contributions made above an the annual allowance during the pension input period. I.e. a tax charge on pension contributions above £60,000 in one tax year.
Not due:
- The year an individual dies (pension savings are set to nil)
- When benefits are taken due to severe ill health (pension savings are set to nil)
Assessing the pension input amount against the annual allowance: Defined-benefit (Final salary) Schemes
-The notional increase in the capital value of any defined‑benefit pension rights is set against the AA.
Calculated by
1. Taking value of pension benefits at the start of the year, and multiplying by 16.
- The value is then increased by the CPI
- Taking value of pension benefits at the end of the year, and multiplying by 16.
- The difference between the two figures is the total pension input, and this is the figure that is tested against the annual allowance.
Assessing the pension input amount against the annual allowance: DEFERRED Defined-benefit (Final salary) Schemes
only annual increases in pension rights that are in excess of either what is required by the pension scheme rules that were in place on 10 October 2010 or CPI for the 12‑month period ending with a month
that falls in the pension input period count towards the annual allowance.
If benefits from a deferred defined‑benefit pension increase by an amount that is less than this, the member is treated as having no pension input.
If increases are in excess of this amount, they will be valued using a factor of 16:1 for the purpose of calculating the annual allowance.
‘Carrying Forward’ - annual allowance
- Unused annual allowance can be carried forwards 3 years
- Provided you have been a member of a registered pension scheme during that time.
- In order to carry forwards, you must use all of your current years AA first.
Tax relief on pension contributions - limits
- Tax relief is given on contributions of up to £3,600 or the value of the individual’s salary - which ever is greater.
- (Income from savings, investments, pensions and other non‑earned sources cannot be included.)
-If the individual has no earned income, £3,600 gross is the limit.
Two ways tax relief is given on contributions into pension: Personal and stakeholder pension contributions
Relief at source
- Contributions are made from net income (after income tax).
- Provider claims back basic rate tax relief from HMRC and adds it to the pot.
- Higher and additional rate taxpayers claim additional relief through self-assessment tax return.
Net pay arrangement
- Contributions are deducted from gross salary, reducing taxable income.
- this gives immediate full tax relief at the individual’s marginal rate with no further action needed.
*Personal and stake-holder contributions are paid net of basic rate tax.
*Retirement annuity contract (RAC) contributions are usually now paid net of basic‑rate tax.
Two ways tax relief is given on contributions into pension: Net pay arrangement
- Occupation scheme arrangement
- This is where the employee contribution is taken from their gross pay before tax is calculated (Thus reducing the amount of income tax paid)
- This means that the employee receives the highest amount of tax relief immediately.
Where the net pay arrangement is not available, contributions will be paid net of basic‑rate tax.
Note: that while the ‘net pay’ contribution is deductible for the purposes of income tax, it is not deductible when calculating National Insurance contributions.
Tax relief if contributions are made by a third party:
Tax relief is limited to 20 per cent at source unless the person for
whom the plan is established is a higher‑rate taxpayer.
This means that a higher‑rate taxpaying parent cannot claim 40 per cent tax relief unless the child is also a higher‑rate taxpayer, and in that case the child would receive the additional relief.
The employer and contributions in relation to tax - how is tax charged on contributions?
- Can make unlimited contributions to an employee’s pension and claim as an allowable expense (So long as they can prove is it wholly and exclusively for the purposes of trade).
-Pension contributions are therefore usually tax-deductible, so long as not disproportionate.
-Employer contributions are made gross, with tax relief claimed as an expense in the accounting year of payment.
- One of the advantages of drawing dividends is that there is no liability to employer or employee NICs on the payments. However, if there are significant contributions made to the directions pension, HMRC may challenge - Contributions large in relation to salary (small salary + big dividends)
Employer and contributions: Salary Sacrifice
Employer contributions set up under salary sacrifice are not deemed a benefit in kind, therefore:
- Income tax not due by employee
- NICs not due on pension contributions
Employees may come to an arrangement in which they forgo part of their salary in order for an additional pension contribution.
Advantage: no liability to employer and employee NICs on the contribution
HMRC is strict on this - cannot be paid into a registered
pension scheme for an employee’s spouse or family member as part of their flexible remuneration package.
However, the effects of a reduced salary on pension death benefits would need to be considered.
Annual allowance charge
- If pension contributions exceed the annual allowance within the pension input period, then a tax charge is due at their rate of income tax on the contributions over the AA.
This is regardless of who makes the contributions above the AA:
- Employer can still claim as a business expense.
- the employee will still be able to claim tax relief on their contribution, as long as it does not exceed 100 per cent of their earnings, although the tax relief will be cancelled out by the annual allowance charge.
The lifetime allowance.
- Scrapped as of 6th April 2024. It is still used to calculate available tax-free cash (LSA)
- There is a lifetime allowance (LTA), or limit, on the total value of registered pension funds held by an individual that can benefit from tax relief.
- The LTA is enhanced (protected) where a member elected for ‘transitional protection’ in respect of their pre-A-day benefits.
- Or, where an individual benefits from a pre-A-day pension credit on divorce
- The enhanced allowances were introduced to protect those who had already built up a pension fund in excess of, or likely to grow to exceed, the lifetime allowance
What is an enhanced (protected) LTA?
The enhanced allowances were introduced to protect those who had already built up a pension fund in excess of, or likely to grow to exceed, the lifetime allowance.
Factors used to determined if LTA has been exceeded
- A factor of 20:1 is used to convert each £1 of benefits from a defined‑benefit scheme to a notional capital sum. This factor will apply irrespective of the age of the member and their retirement date. (pg 206) - this is used when benefits have not been taken
- A factor of 25:1 is used to convert each £1 of benefit already in payment prior to 6th April 2006 to a notional capital sum. This higher factor assumes a tax-free sum will already have been taken.
- Where a member is in receipt of pension fund withdrawal benefits that started before 6 April 2006, it is assumed that the income being withdrawn is the maximum available for someone of that age,
Lifetime allowance charge
- Removed from 6th April 2023. was a tax charge on crystallising benefits that exceed the available LTA.
- Instead, for certain lump sums, the individual will be charged income tax at their highest rate. These lump sums include:
- Serious-ill health LS
- Uncrystallised LS death benefits
- LTA excess LS
- DB LS death benefits
At any time when an individual crystallises (takes) benefits from a registered pension scheme, there must be a check to ensure that the lifetime allowance has not been exceeded.
What must an individual do each time they looks to crystallise benefits from a registered pension scheme?
Check whether their lifetime allowance has not been exceeded.
Otherwise, a tax charge will occur on the amount in excess of the LTA. This is charged at the individuals highest rate of income tax
Crystallisation events (Name 6)
- Commencing pension fund withdrawal (drawdown)
- Purchasing a lifetime annuity
- Taking lump sum cash benefits
- Reaching the age of 75 with an uncrystallised pension
- Paying a lump sum death benefit
- Transferring to an overseas pension scheme.
Tax treatment of registered pension funds
Extremely tax efficient
- There is no CGT on gains made on investments within the pension fund.
- The is no income tax on any income generated by investments within the pension fund. If any tax has been deducted at source, it can be reclaimed by the fund.
Tax treatment of registered pension scheme
death benefits - Defined benefit schemes
For DB schemes:
- Usually provide lump sum death benefit and scheme pension
- The lump sum death benefit is usually a set amount or a multiple of the member’s salary.
For DB schemes, member under 75:
- Paid tax free if under LTA and within 2 years of death
For DB schemes, member over 75:
- Taxed as either the recipient’s income via PAYE (or 45% if to a trustee or representative)
- Isn’t tested against LTA.
A scheme pension is taxable as the recipient’s income regardless of the age at death.
A trivial commutation lump sum death benefit may be paid when the value of a dependant’s pension or remaining guaranteed instalments are £30,000 or less - non-crystallisation event but is taxed as income (regardless of when death occurred).
Tax treatment of registered pension scheme
death benefits - Defined contribution schemes
For DC schemes, member under 75:
- Paid tax free if under LTA and within 2 years of death
- If in drawdown or receiving annuity, benefits are tax free if paid within 2 years either if lump sum or as income.
For DC schemes, member over 75:
- Taxed as either the recipient’s income via PAYE (or 45% if to a trustee or representative)
- If in drawdown or receiving annuity, any lump sum is taxed as income (or at 45% if to a trustee or rep).
What is a trivial commutation lump sum death benefit
A trivial commutation lump sum death benefit is a payment made from a pension scheme when the total value of a deceased person’s pension benefits is below a certain threshold.
This type of payment allows the beneficiaries to receive the pension benefits as a one-off lump sum rather than through regular payments.
Can be made when the remaining pension is £30,000 or less.
What is the Pension-commencement Lump Sum?
Upon first taking benefits from a registered pension (i.e. crystallisation) an individual can take a maximum of 25% of the value of the pension fund as tax free cash.
This is normally to a maximum of 25% of the recipient’s available lifetime allowance.
For a member of a defined‑benefit scheme, taking the maximum PCLS needs to be considered carefully since it can reduce the amount of pension income available
